One of the most common questions we are asked is about the various steps involved in the buying or selling of a web hosting business. Recently, Frank sat down with Internet industry attorney David Snead (dsnead.com) and talked through the process.

We hope this has been of interest and are happy to discuss any of these topics at your convenience.

Hillary Stiff & Frank Stiff

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.

Authors: Hillary Stiff & Frank Stiff of Cheval Capital have been investment bankers completing M&A transactions, arranging financing and providing financial advice for a large number of companies including The Endurance International Group, SingleHop, Rackspace, Web.Com among many others. They have completed over 270 successful web hosting, ISP and related transactions and distribute a list of hosting and related companies that are for sale.

We want to thank you all for a great 2014 and wish you the best for a healthy, happy and prosperous 2015. Here at Cheval we completed 25 hosting and related transactions in 2014 pushing our total to over 275 Internet services transactions since we first got started in the space in the late 1990s.

As the year comes to a close, we thought it might be helpful to provide a summary of the things that got our attention in the ~$50bn/year Hosting, Cloud, and Infrastructure-as-a-Service businesses (collectively “Hosting”) in 2014.

AWS competitors gain traction

Amazon’s biggest Cloud competitors (Microsoft, IBM, Google) made significant progress in 2014 and appear to have gotten onto a path of sustained growth. While comparing these companies to Amazon Web Services is very much an apples-to-oranges comparison (in terms of both size and products) the emergence of these companies’ Cloud offerings into solidly growing businesses has created more choices for users and increased the overall level of industry competition. It is also interesting that these companies have separated themselves from the rest of the industry in terms of scale and capabilities.

Cheval sponsored a panel at HostingCon 2014 titled "Understanding Valuation – How the big guys do it." We’ve transcribed/edited HostingCon’s recording of the panel into a series of posts that we will be putting up over the next few months. Here is the first one.

We have been fortunate to help buyers and sellers complete over 250 hosting, ISP and related transactions in all shapes and sizes. Over the course of these transactions we have seen that hosters that have the numbers to answer the fundamental questions about their business do better in both their day to day operations as well as when it comes time to sell or raise capital. These numbers, often called metrics or Key Performance Indicators (KPIs), are straightforward and can have a big positive impact on your business.

The reason metrics can have such a big impact is that they give a buyer or investor confidence about exactly what is happening with the business. When metrics do not exist, hosters cannot effectively answer the important questions about their business and buyers & investors lower valuations (or choose not proceed) to compensate for what they don’t know.

Even if your business is not perfect, being able to give buyers confidence about what is going on with regard to these topics can result in a better valuation.

Metrics & The Top 10 Questions You Need to Answer

Metrics are really just numerical answers to a particular question about your business. For example, “How big is your business?” is a pretty typical question that can be answered with a variety of numbers from your financial statements (e.g. Revenues or EBITDA) or your customer database (e.g. total number of customers) or even your payroll report (e.g. total number of employees.)

Here are some key questions that buyers and investors often ask and the typical sources of the metrics that can help answer them (this is not an exclusive list).

As you can see from the list above, there are two main sources of data to answer these questions. The first are financial statements. Thanks to the availability of easy to use and relatively inexpensive accounting software this is a lot easier than it used to be. Accountants are also plentiful and affordable (as smaller hosters generally only need one part time.)

The bigger problem is the 2nd source of data – the Customer Database. Unfortunately, many of the systems used in hosting today don’t provide easy/complete access to data in their underlying customer database. (And some don’t track all the data needed to answer the above questions.) We’ve seen hosters do a variety of things to get the data, ranging from (a) putting in place their own systems, to (b) hiring an SQL programmer to help them pull the data out of billing systems, to (c) collecting data by hand each month in a spreadsheet.

Conclusions

Tracking basic metrics can be of great value to your business both in day to day operations and when it comes time to sell or raise capital. The key is starting the process right away as even a basic package of metrics is far better than none at all.

Please feel free to get in touch with any questions or comments.

Hillary Stiff

Author: Hillary Stiff is Managing Director of Cheval Capital. She has been an investment banker since 1990, completing M&A transactions and arranging financing for a number of companies including Nextel Communications, NTT/Verio and The Endurance International Group. She has helped completeover 250 successful web hosting and ISP M&A transactions and distributes a list of hosting and related companies that are for sale.

DISCLAIMER: This summary is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell companies or a comprehensive discussion of the risks involved in buying or selling a company. Please be sure to consult your legal and financial advisors when considering the purchase or sale of a business or completing other financial transactions. Cheval Capital assumes no responsibility or liability for any of the information contained herein.

[1] A cohort would be a group of customers that were added at the same time. So if you looked at the monthly revenue for all the customers added in January 2012 vs January 2014, you might see that while you lost 20% of the customers, total revenue only went down by 10% as some customers got larger.